Sam Fletcher
Senior Writer
HOUSTON, Dec. 15 -- Forecasts of more snowstorms in major US market areas and below-normal temperatures in most of the country prompted a jump in energy futures prices Friday.
However, the capture of former Iraqi President Saddam Hussein by US forces Sunday apparently triggered a decrease in oil prices in overnight electronic trading early Monday. Saddam's capture would likely trigger nervous selling on energy futures markets, some analysts said. Some claimed Friday's rally in commodity prices went too far for market fundamentals.
Market implications
Saddam's capture—confirmed by DNA testing—in the Tikrit region of Iraq, "marks a significant positive psychological development for US forces 7 months after the fall of Baghdad. For the oil markets, however, the bottom line concerns potential implications for the country's oil flows and exports," said Michael Rothman, senior energy market specialist at Merrill Lynch Global Securities Research & Economics Group, New York.
The arrest of Saddam Hussein "may help catalyze a pull-back in prices" from recent levels of $32-33/bbl that were "politically unpalatable" to both key exporting and importing countries, Rothman reported Monday.
However, he said, "The breadth and pattern of resistance to US occupation of Iraq suggest that the insurgency producing a spasmodic reconstitution of the country's oil industry may not dissipate quickly even with Saddam's capture. In this regard, any claims about an imminent elimination of terrorist activity in the post-war period may prove premature."
Even if Saddam's capture opened the door for an immediate rebound of Iraq's oil production and exports to pre-war levels, Rothman said, "The basic outlook we have for prices in 2004—an average of $26.50[/bbl] for West Texas Intermediate—would go unchanged." It is already assumed that Iraq would reach those output and export levels by spring, and the projected average demand next year for 27 million b/d of crude from the Organization of Petroleum Exporting Countries "allows for a comfortable reintegration" of Iraqi production, he said.
Furthermore, said Rothman, "We disagree with assertions by many market pundits that current oil prices reflect a 'terrorist premium' of up to $9/bbl. These views, like those about the 'war premium' earlier this year, ignore underlying fundamentals, including a still large storage deficit and limited spare production capacity."
Energy prices
The January contract for benchmark US light, sweet crudes climbed by $1.19 to $33.04/bbl Friday on the New York Mercantile Exchange, while the February position jumped by $1.20 to $32.95/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., gained $1.18 to $33.03/bbl.
Heating oil for January delivery shot up by 4.08¢ to 92.56¢/gal. Friday on NYMEX, while unleaded gasoline for the same month gained 3.66¢ to 90.04¢/gal. The January natural gas contract escalated by 60.6¢ to $7.22/Mcf on NYMEX, "lifted first by a firm cash [price on the US spot market] and mostly supportive weather forecasts through this week, then by a late wave of short covering [as traders bought to cover open sales contracts on the gas futures market] ahead of the weekend," said analysts Monday at Enerfax Daily.
Gas market outlook
"The rally reflected the fact that traders didn't want to be caught short ahead of a weekend, particularly with forecasts calling for continued cold weather until the Christmas holiday," said Enerfax analysts. "But while technical traders agreed the charts were bullish, the market is overbought and due for a pullback early this week, unless the weather turns even colder."
The February natural gas contract gained 49¢ to $7.19/Mcf Friday. "The market has surged nearly 50% this month," analysts noted.
The rapid escalation of natural gas futures prices has attracted attention among federal regulators and legislators in Washington, DC, sparking calls for investigations. Sen. Orrin G. Hatch (R-Utah, chairman of the Senate Judiciary Committee, said Friday he will conduct hearings next month into whether there has been improper manipulation of natural gas markets.
Some have suggested that trading strategies among large hedge funds triggered much of the price escalation. However, NYMEX executives insisted Friday that they had not seen evidence of manipulation. J. Robert Collins, president of NYMEX, said much of the recent price increase is the result of reduced investments in infrastructure, drilling, and trading activities by energy companies since the collapse of Houston-based Enron Corp. 2 years ago.
"The natural gas industry is in the midst of a turbulent transformation as ChevronTexaco [Corp.], ExxonMobil [Corp.], and other majors increasingly hunt overseas, leaving smaller players scrambling to pick up the slack domestically," said Enerfax analysts. "The shift exacerbates an already constrained market, in which supplies have been tight and prices high amid rapidly declining productivity in the nation's aging natural gas fields," they said.
"Spot prices for natural gas are currently near $7/MMbtu, and the 12-month futures strip closed [last] week at $5.59/MMbtu, just above our current 2004 forecast of $5.50/MMbtu," said Jeffrey L. Mobley, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.
"We expect natural gas prices to remain strong through the winter, despite high storage levels, as the market continues to price-ration declining [North American] gas production from the industry. We do not expect the supply picture to change much in 2004 or in fact for the next several years, which should keep average natural gas prices in the range of $4.50-6.50/MMbtu and E&P profits robust," Mobley reported Monday.
Other markets
In London, the January contract for North Sea Brent oil gained 80¢ Friday to $30.37/bbl on the International Petroleum Exchange. Gas oil for January delivery increased by $5.75 to $267/tonne, while the January natural gas contract inched up by 0.9¢ to the equivalent of $5.79/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes was up by 48¢ to $29.90/bbl Friday.
For last week as a whole, however, the OPEC basket price averaged $29.36/bbl, up by 86¢ from the previous week. So far this year, OPEC's basket price has averaged $27.99/bbl, compared with an average price of $24.36/bbl for all of 2002.
Contact Sam Fletcher at [email protected]
